Industrial real estate has been a top performer in recent years. Core drivers, including economic growth, changing supply chains, and construction constraint, remain in place—suggesting continued outperformance.
Ugly duckling turned swan
Industrial real estate has been the star performer in commercial real estate markets in recent years. Several key economic factors have combined to drive strong growth in the subsector, and we believe the outlook for industrial assets is favorable.
Industrial real estate investors typically seek income generated from long-term leases to industrial tenants, as well as capital preservation and growth over time. Industrial properties are typically large, and rents per square foot are significantly lower than those in other commercial real estate sectors, so cost management is a key driver of investor returns.
Industrial real estate performs well when the economy is growing as it benefits from increased consumer spending and rising trade. Economic downturns generally reduce demand for industrial space and thus dampen the sector’s performance.
Industrial market fundamentals
Over the last two years, industrial has performed very well, significantly outperforming the broader real estate market (Figure 1). This growth has been driven by a mismatch between supply and demand.
Demand for industrial space has been unusually high in recent years, driven by the twin engines of economic growth and the rise of ecommerce.
Unemployment has been falling for 25 consecutive quarters, making this one of the longest periods of economic expansion in American history (Figure 2).1 As the economy grows and produces more goods, there is a greater need for manufacturing and warehouse space. Thus, demand for industrial has risen with the expanding economy.